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  Forex Articles & Studies
 
 
 
                                               Understanding FX Liquidity
 
 
 Authors: Nina Karnaukh. University of Saint Gallen
               Angelo Ranaldo. University of Saint Gallen
               Paul Söderlind. University of Saint Gallen
                                         Date: April 2015
 
 Abstract:

We provide a comprehensive study of the liquidity of spot foreign exchange (FX) rates over more than two decades and a large cross-section of currencies. First, we show that FX liquidity can be accurately measured with daily and readily-available data. Second, we demonstrate that FX liquidity declines with funding constraints and global risk, supporting theoretical models relating funding and market liquidity. In these distressed circumstances, liquidity tends to evaporate more for developed and riskier currencies. Finally, we show stronger comovements of FX liquidities in distressed markets, especially when funding is constrained, volatility is high, and FX speculators incur losses.

 
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